Question

Monty loaned his friend Ned $20,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $11,000, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $11,000 as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $9,000 and taxable income of $45,000. During the current year, Ned paid Monty $10,000 in satisfaction of the debt. Determine Monty’s tax treatment for the $10,000 received in the current year.

Answer 1

the amount of $10,000 received for the previous bad debt deduction must be included in the current years income.

Step-by-step explanation:

The account receivable that is previously been written off as uncollectible but received during the current tax year requires a reversal of the write-off entry. however, if it was written off as uncollectible during the tax year then the tax benefit rule requires tha the income must be reported.

the amount of $10,000 received for the previous bad debt deduction must be included in the current years income.